Finding Fault with Wonnell's 'Two Contractual Wrongs'

Abstract:     
This essay is a comment on an article by Professor Chris Wonnell entitled "Expectation, Reliance, and the Two Contractual Wrongs." Both Wonnell's article and this comment will appear in a forthcoming symposium on the Reliance Interest to be published in the San Diego Law Review. Wonnell's thesis is that the concepts of expectation and reliance are not simply two different ways of conceiving compensation; rather, they are two different ways of conceiving contractual wrongs. Expectation damages remedy the wrong of breaching a contractual promise that should have been performed. Wonnell also suggests that courts should choose between expectation and reliance remedies depending on the reason for the breach, but with a strong presumption in favor of expectation.

I agree with much of Wonnell's thesis, which draws on and is broadly consistent with my prior article, The Fault Lines in Contract Damages, 80 Va. L. Rev. 1225 (1994). In my comment, I expand on my view that an economic approach to contract damages supports a fault-based system in which courts adjust the damage measure depending on the reason for the breach, and that this is the system we actually have. The expectation remedy is superior to reliance for deterring opportunistic breaches. The reliance remedy is not sufficient to deter opportunistic breach once one considers the gains to the promisor from the opportunistic behavior beyond the immediate contract. On the other hand, the reliance remedy is superior to expectation for deterring nonopportunistic breaches. Although Wonnell accepts the argument of some economic scholars that the expectation remedy serves a cost-minimizing "pricing" function in nonopportunistic breach cases, in my view the pricing advantage of the expectation remedy is overstated. My conclusion is that our theoretical energies should now be directed away from the abstract superiority of expectation or reliance in general and toward the development of better presumptions of opportunistic and nonopportunistic breach.

Working Paper Series